According to the Construction Payments Report, delayed payments cost the construction industry $64 billion in just 2019 alone. What does this tell us? In short, the payment system within this industry is severely disjointed. So much so, that when working in construction, not being paid on time is almost to be expected in the industry today.
Unfortunately, the further away you are from the top of the payment chain, the longer it generally takes for you to receive your hard-earned money. With that in mind, lets dig further into why this happens, and what you can do about it.
The average time to receive payment for construction work is one of the longest when compared to other industries. In real terms, it’s relatively normal to see invoice payments taking between 50 and 70 days, and could be far longer, especially if a construction loan is involved.
Typically, that 50 – 70 day period starts once you’ve sent your invoice to your client. So, in reality, you could quite easily add an extra 10-20 days if you were to include the time you spent actually working on site. A more accurate time estimate would be roughly 70-91 days to receive any income from a given job.
This isn’t just opinion; studies confirm that within the construction industry, it takes on average 83 days to get paid. Interestingly this is the most prolonged period of any sector in the world!
The bottom line: This isn’t good enough.
Delayed or partial payments can have a negative effect on a company’s cash flow, especially considering just how large these payments can be in the construction industry.
The Negative Effects of Delayed Payments on Cash Flow
Construction businesses must take action and address cash flow issues to prevent dire problems, such as high interest expenses, missed employee payroll, or even bankruptcy. So why is cash flow such a problem in this industry?
In simplest terms, successful cash flow management involves insuring your business has enough revenue coming in to cover recent expenses. Since most construction companies bill for work they’ve already performed, they are spending significant amounts of money on labor and supplies long before they have an opportunity to receive any form of payment. Because the scale of these expenses can be extreme, this can be very difficult for construction companies to navigate financially.
On top of the billing timeline issues, the long payment timelines can then cause even more difficulty for construction companies to maintain positive cash flow.
All of which can lead to any of the following scenarios:
- High interest expenses on lines of credit or short term loans
- Losing subcontractors due to non-payment
- Loss of industry reputation
- Breaking trust with your customers or within your company
- Using funds from one project to pay for the expenses of another
It’s best to put measures in place to prevent poor cash flow from occurring in the first place as it’s tricky to stop a downward spiral of deterioration when cash flow dries up.
So, how can construction companies better manage their cash flow?
How to Manage Cash Flow Better
If you’re struggling to keep a positive cash flow, don’t worry, you’re not alone. For the remaining part of this article, we’ll look at five ways you can improve your company’s cash flow:
Offer Early Payment Discounts
To encourage clients to pay on time, or even in advance, you could offer them a slightly discounted price on a job as an incentive.
Be careful! Make sure that the discount does not impact your financial position too negatively, but it is significant enough to encourage your customer to pay sooner. It’s very common for contractors and construction supply companies to offer a two to five percent discount for early payment.
To do this effectively, look at your pricing strategy to ensure that there is enough buffer to offer a discount or that the early payment could help reduce interest expenses you might have otherwise incurred.
Offer Multiple Payment Options
Make sure you have multiple ways for clients to be able to pay your invoices and encourage them to use a low cost electronic payment method to help boost your cash flow. Common payment methods used by many companies include:
- Bank transfer or ACH
- Credit card
- Cash or Check
If you haven’t already, talk to your bank to ensure that you can accept payments via credit card or ACH, or use an online service to coordinate the payments for you.
Having a range of payment options available to clients makes the invoice more accessible and convenient. In turn, it could speed up payments and improve your overall cash flow.
Collect a Deposit
Trust underpins the construction industry, and it’s rare for contractors to request a deposit from customers before work commences.
A deposit is a key element to maintaining positive cash flow as a contractor and should be thought of as a necessary element for every job. Explaining to your customer that the deposit is used to pay for the initial supplies for the job is a realistic and common request. Some contractors refer to this as a mobilization payment which is a familiar term among bankers, title agents, and others who may be involved in the payment approval process.
Using an online payment system and tools that allow you to share project budget and spending can also help instill customer trust. When the customer can see their dollars being actively used for project expenses, they become less likely to challenge a request for deposit or future payment requests.
Monitor Your Financials
To identify where your cash flow is healthy and thriving, you need to have accurate accounting reports and financial statements. You can’t manage positive cash flow if you are unable to measure where your income is coming from and going to.
These documents will illustrate your company’s financial standing and history. A cash flow forecast also helps, as it highlights potential cash flow problems, enabling you to take action early.
Know Your Lien Rights
Many states have varying regulations when it comes to contractors’ rights to filing and enforcing mechanics liens against a property. Depending on your role on a project, you may have a limited time to act on your rights to file a lien against a property where you have not been paid and ensure your payment is secure.
Understanding the rules and regulations around lien rights in the state where the projects you are working on are is a good way to protect your revenue stream. Using things like preliminary notices to put pressure on the parties responsible for payments on your projects can help ensure your cash flow stays positive.
Do You Need Assitance Managing Your Construction Payments?
If you’re nodding yes, take a look at LMS Project! We offer a simple to use online platform that helps you better manage your payments and lien releases to reduce paperwork, as well as unique payment tools that allow you to pay subcontractors and suppliers faster, and earn money back while you do it!
For more details about our services, please feel free to reach out and talk to our friendly team today. We’re happy to answer any questions and explain how we can not only save you time, but improve your company’s cash flow as well!